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Hulley v. Russia 2014

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potentially serve to assist the Tribunal’s decision-making. The Tribunal finds, for the reasons stated above, that no such possibility exists or existed in this case.

1427. Furthermore, the Tribunal notes that neither Party disputes that, in the event of a referral, any determinations of the Competent Tax Authorities regarding whatever discrete issues they might have been able to focus on relating to whether any tax was an expropriation would not have been binding on the Tribunal. The wording of Article 21(5)(b)(iii) of the ECT is very clear: bodies such as the present Tribunal may take into account any conclusion arrived at by the Competent Tax Authorities regarding which the tax is an expropriation.1866

1428. In conclusion, the Tribunal holds that a referral of the dispute to the “Competent Tax Authorities” within the meaning of Article 21(5)(b)(i) of the ECT would clearly have been futile at the outset of this arbitration and was therefore not required. It remains futile today.

iii.Conclusion

1429. As a consequence, assuming (for the sake of argument) that some of Respondent’s measures fell within the scope of the carve-out in Article 21(1), the Tribunal would nevertheless be in a position to proceed to determine whether the relevant measures constituted a violation of Article 13 of the ECT under the claw-back. It could do so even though it has not referred the issue of whether any tax is an expropriation to any of the Competent Tax Authorities because to do so would clearly be an exercise in futility.

(c)Second Reason: The Carve-Out Does Not Apply

1430. Secondly, and independently from the above reasoning, the Tribunal concludes that it has jurisdiction to rule on Claimants’ claims under Article 13 of the ECT due to the fact that the Article 21 carve-out does not apply to the Russian Federation’s measures because they are not, as the Tribunal has concluded above, on the whole, a bona fide exercise of the Russian Federation’s tax powers.

1431. This accords with Claimants’ view that Article 21 of the ECT can apply only to bona fide taxation actions, i.e., actions that are motivated for the purpose of raising general revenue for the State. By contrast, actions that are taken only “under the guise” of taxation, but in reality

1866

Claimants’ Post-Hearing Brief ¶ 229; Transcript, Day 21 at 194 (Respondent’s rebuttal).

 

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aim to achieve an entirely unrelated purpose (such as the destruction of a company or the elimination of a political opponent), argue Claimants, cannot qualify for exemption from the protection standards of the ECT under the taxation carve-out in Article 21(1).

1432. The Tribunal essentially accepts the latter interpretation of Article 21.

1433. To find otherwise would mean that the mere labelling of a measure as “taxation” would be sufficient to bring such measure within the ambit of Article 21(1) of the ECT, and produce a loophole in the protective scope of the ECT. Since the claw-back in Article 21(5) of the ECT relates only to expropriations under Article 13 of the ECT, a State could, simply by labelling a measure as “taxation”, effectively avoid the control of that measure under the ECT’s other protection standards. It would seem difficult to reconcile such an interpretation with the purpose of Part III of the ECT.

1434. The Tribunal cannot agree with Respondent that, by finding that Article 21(1) of the ECT applies only to bona fide taxation, the Tribunal would be conflating the requirements for the application of the taxation carve-out (representing an exception to the protection standards under the ECT) and the requirements for the application of the protection standards themselves. For example, Article 13 of the ECT could be violated through a bona fide taxation measure that was aimed at the raising of State revenue, but whose effect was expropriatory. By contrast, the characterization of an incriminated action by a respondent State as a Taxation Measure for purposes of Article 21(1) of the ECT would be independent of the effects of that action, but rather depend on the motivation underlying it.

1435. The Tribunal also sees no reason to assume that it would be better for the question of the motivation underlying a particular measure to first be addressed through the “Competent Tax Authorities” (pursuant to the referral mechanism under Article 21(5) of the ECT), as the particular expertise of these authorities does not extend to the question of whether an act that on its face appears to be a taxation measure is in reality implemented for improper reasons. To the contrary, where the tax authorities of a State have participated in measures against an investor whose true purpose is unrelated to taxation, submitting these issues to the preliminary examination of the same authorities would add little value for an arbitral tribunal.

1436. The Tribunal further observes that, by making this finding, it is in good company, and that the two eminent arbitral tribunals which have previously considered, on an admittedly more limited record, essential elements of the dispute now before it, have adopted the same view.

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1437. Thus, the RosInvestCo tribunal concluded that:

[I]t is generally accepted that the mere fact that measures by a host state are taken in the form of application and enforcement of its tax law, does not prevent a tribunal from examining whether this conduct of the host state must be considered, under the applicable BIT or other international treaties on investment protection, as an abuse of tax law to in fact enact an expropriation.1867

1438. Similarly, the Quasar tribunal opined that:

It is no answer for a state to say that its courts have used the word “taxation” . . . in describing judgments by which they effect the dispossession of foreign investors. If that were enough, investment protection through international law would likely become an illusion, as states would quickly learn to avoid responsibility by dressing up all adverse measures, perhaps expropriation first of all, as taxation. When agreeing to the jurisdiction

of international tribunals, states perforce accept that those jurisdictions will exercise their judgment, and not be stumped by the use of labels.1868

1439. By contrast, neither the EnCana v. Ecuador decision1869 nor the Burlington v. Ecuador award1870 to which Respondent refers in support of its view that any measure “adopted in apparent [reliance on] tax legislation” should fall under the taxation carve-out,1871 in fact appears to endorse such a position.

1440. Thus, while the tribunal in EnCana stated that, for a measure to fall under the taxation carveout in the treaty before it, it would have to be “sufficiently clearly connected to a taxation law or regulation (or to a procedure, requirement or practice of the taxation authorities in apparent reliance on such a law or regulation),”1872 the emphasis in this formulation appears to have been on the “sufficiently clea[r]” connection to an existing legal provision or practice, rather than the “apparent reliance” of the authorities on the existence of a legal basis for their actions. This is supported by another statement of the EnCana tribunal in the same paragraph, according to which “an arbitrary demand unsupported by any provision of the law of the host State would not qualify” for an exemption under the taxation carve-out.1873

1867

1868

1869

1870

1871

1872

1873

RosInvestCo ¶ 628, Exh. C-1049. Quasar ¶ 179, Exh. R-3383.

Transcript, Day 3 at 174 (Respondent’s opening); Transcript, Day 21 at 179, 183 (Respondent’s rebuttal) (discussing EnCana v. Ecuador, LCIA UN3481, UNCITRAL, Award, 3 February 2006 ¶ 142, Exh. C-976).

Transcript, Day 3 at 174 (Respondent’s opening); Transcript, Day 21 at 182–83 (Respondent’s rebuttal) (discussing Burlington Resources v. Ecuador, ICSID Case ARB/08/5, Decision on Jurisdiction, 2 June 2010 ¶ 207, Exh. R-992).

Transcript, Day 3 at 174 (Respondent’s opening).

EnCana v. Ecuador, LCIA UN3481, UNCITRAL, Award, 3 February 2006 ¶ 142(1), Exh. C-976. EnCana v. Ecuador, LCIA UN3481, UNCITRAL, Award, 3 February 2006 ¶ 142(1), Exh. C-976.

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1441. The context of the statement also makes it clear that the tribunal was only addressing minimum requirements for the application of the taxation carve-out before it, rather than expressing any views about situations in which the carve-out provision would not apply. Thus the tribunal emphasized that, for a measure to come under the treaty’s carve-out, it would have to be “sufficiently clearly connected to” or supported by some taxation law, regulation or actual practice (the latter of which would in turn have to be based on a taxation law or regulation). It did, however, neither say nor imply that any measure which the authorities based on a taxation law or regulation would by definition be regarded as a taxation measure and therefore justify the application of the carve-out.

1442. It makes sense to regard a tax demand that is effectively motivated not by the aim of raising public revenue but by a purpose extraneous to taxation as an “arbitrary demand” that, in the words of the EnCana tribunal, cannot qualify for an exemption under a taxation carve-out.1874 Such an interpretation is also supported by the statement of Claimants’ expert Professor Crawford, who was the presiding arbitrator in the EnCana arbitration and according to whom the decision was not meant to imply “that anything labelled as a taxation measure is excluded” by a taxation carve-out.1875

1443. Neither does the Burlington decision referred to by Respondent support the view that a taxation carve-out would have to apply to any measure adopted by tax authorities in apparent reliance on tax legislation. In Burlington, the tribunal notes that “bad faith” of the respondent mentioned by the claimant rested on its allegation that Ecuador had forced the claimant to give up certain contractual rights by the use of its taxation legislation.1876 There was no suggestion in that case that Ecuador had taken any measures against the investor for motives that were entirely unrelated to the raising of public revenue. As a consequence, the tribunal in Burlington, when it said that the claimant’s suggestion “that Respondent used its tax power in bad faith in order to force Claimant to surrender its rights” under the contracts raised “matters of taxation”,1877 was referring to the specific situation in that case that cannot in any way be compared to the one at issue in the present proceedings.

1874

1875

1876

1877

EnCana v. Ecuador, LCIA UN3481, UNCITRAL, Award, 3 February 2006 ¶ 142(1), Exh. C-976.

Transcript, Day 17 at 161 (Claimants’ closing); Further Opinion on Jurisdictional Issues by James Crawford, 3 May 2007 ¶ 5, Exh. C-613.

Burlington Resources v. Ecuador, ICSID Case ARB/08/5, Decision on Jurisdiction, 2 June 2010 ¶ 175, Exh. R-992. Burlington Resources v. Ecuador, ICSID Case ARB/08/5, Decision on Jurisdiction, 2 June 2010 ¶ 207, Exh. R-992.

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1444. It follows that Article 21(1) of the ECT, which applies only to bona fide taxation measures, does not find any application in this arbitration. The tax assessments levied against Yukos by the Russian Federation, which the Tribunal has found were designed mainly to impose massive liabilities based on VAT and related fines, and were essentially aimed at paralyzing Yukos rather than collecting taxes, are not exempt from scrutiny under the ECT, as they are not captured by the carve-out of Article 21(1).

1445. Similarly, and a fortiori, subsequent steps in the enforcement of the tax assessments are not captured by the carve-out, because the Tribunal has found that they too were exigently pursued by means that indicate that Yukos was not just being chased to pay taxes, but was being driven into bankruptcy.

(d)Conclusion

1446. Based on the analysis set out in this chapter of the Award and for the two independent reasons set out above, the Tribunal has jurisdiction to consider whether the Russian Federation is liable to Claimants under Article 13 of the ECT for the measures which it has adopted and which have resulted in the evisceration of their investments and the destruction of Yukos.

1447. While the Tribunal’s finding that the carve-out in Article 21(1) does not apply would in principle allow the Tribunal to consider the measures under both Articles 10 and 13 of the ECT, in the circumstances, as will be seen, it will not be necessary for the Tribunal to consider whether the expropriatory measures of Respondent are also in breach of Article 10 of the ECT.

X.LIABILITY

1448. Having dismissed Respondent’s preliminary objections to the Tribunal’s jurisdiction, the admissibility of Claimants’ claims and the applicability of the ECT in the present case, the Tribunal now turns to the question of the Russian Federation’s liability under the Treaty. In Part VIII, the Tribunal canvassed the evidentiary record put before it by the Parties. In this Part X, the Tribunal draws the legal consequences of its factual conclusions, beginning by addressing questions of attribution.

1449. As has already been mentioned, the Tribunal’s eventual conclusions regarding the alleged breaches by Respondent of Article 13 (Expropriation) of the ECT will make it unnecessary for the Tribunal to consider the application of Article 10 (Promotion, Protection and Treatment of

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Investments). Nevertheless, for the sake of completeness, the Tribunal will set out the Parties’ arguments with regard to Article 10. The Tribunal will then set out the Parties’ arguments in respect of Article 13. Finally, the Tribunal will set out its decision regarding Respondent’s liability and Claimants’ contributory fault.

A.ATTRIBUTION

1450. The Parties are divided on the question of whether some of the actions of which Claimants complain are attributable to the Russian Federation. Below, the Tribunal sets out the Parties’ submissions and its own views on this question.

1.Claimants’ Position

1451. Claimants summarize their position with regard to the attribution of acts said to constitute breaches of the ECT to Respondent in their Memorial as follows:

[T]he Russian Federation has acted through almost all of its organs, be it Executive or Judiciary, at all levels, including the highest, in seeking the destruction of Yukos. These include the President of the Russian Federation, the Presidential Administration, the Tax Ministry (later to become the Federal Taxation Service, a federal body of executive authority within the Ministry of Finance), the Ministry of Justice (under whose authority federal bodies of executive authority such the Federal Bailiff Service or the Federal Penitentiary Service are acting), the Prosecutor General’s Office (a federal body entrusted with the task of execution of the laws in the name of the Russian Federation), the Ministry of Internal Affairs (responsible for the police forces), the Federal Security Service (also a federal body of executive authority, acting under the authority of the President). When not acting through these Executive organs or through the Russian courts, the Russian

Federation was acting through State-owned entities, first and foremost State-owned company Rosneft . . .1878

[emphasis added]

1452. Claimants put forward a similar view at the Hearing:

[W]e complain of acts of the executive organs. That’s the President; the Prime Minister; ministries, including Tax, Justice and Interior Ministries; and their constituent bodies, the Federal Bailiffs Service and the Federal Penitentiary Service under Justice.

We complain of the actions of executive bodies or agencies: that would be the Prosecutor General’s Office, the Federal Property Fund and the Federal Security Services. We also complain of the actions of the courts . . . . These are actions of the Russian Federation State organs, and they are, by definition, actions of the State.1879

[emphasis added]

1878

1879

Memorial ¶ 551.

Transcript, Day 20 at 252.

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1453. In particular, with regard to the bankruptcy proceedings against Yukos, Claimants assert that:

The Russian Federation initiated the bankruptcy proceedings through Rosneft, whilst the Russian courts ensured that the Russian State directly and through Rosneft would be the main creditor in the proceedings, systematically rejecting the claims of creditors related to Yukos or Yukos’ shareholders. Thus placed in the driving seat in these bankruptcy proceedings, the Russian State, acting through the Federal Taxation Service and Rosneft, rejected the Rehabilitation Plan proposed by Yukos’ management and paved the way for itself, through bankruptcy receiver (Mr. Rebgun) and the Russian Federal Property Fund to distribute the rest of Yukos’ assets by auctioning them at bargain prices. The vast majority of the proceeds went to the Russian State, with Rosneft acquiring Yukos’ two other main production assets, Samaraneftegaz and Tomskneft, at a substantial discount.”1880

[emphasis added]

1454. Claimants seek to attribute the following actions of Rosneft (some of them through Rosneftcontrolled YNG) to Respondent:

Rosneft’s action in acquiring Yugansk through Baikal, a special vehicle used to conceal Rosneft’s involvement in the Yuganskneftegaz auction.

Rosneft’s entering into an agreement with the consortium of banks in order to initiate the bankruptcy and precipitate the liquidation of Yukos.

. . .

[T]he decisions made at the creditors’ meeting hand in hand with the Russian Tax Ministry, namely: to vote against the rehabilitation plan; to vote against the admission of any Yukos-related creditor; and to vote for the liquidation of Yukos.1881

1455. Claimants take the view that “the actions of Rosneft are attributable to the Russian State”1882 due to the latter’s ownership of and control over the former, which would be “established by the fact that members of Rosneft’s Board of Directors hold parallel positions in the Executive branch of the Russian Federation and that Rosneft’s President is appointed by the Russian Executive.”1883 Claimants refer to a statement made by Rosneft in the context of its IPO in July 2006, acknowledging that “the Russian Government . . . controls Rosneft and may cause Rosneft to engage in business practices that do not maximize shareholder value.”1884 Claimants also cite a statement made by President Putin at a press conference in December 2004 and a decision rendered by the Amsterdam Court of Appeal in proceedings between Yukos Capital

1880

1881

1882

1883

1884

Reply ¶ 718; see also Transcript, Day 20 at 252. Transcript, Day 20 at 253–54.

Reply ¶ 721.

Memorial ¶ 551. See also Transcript, Day 20 at 254–55. Transcript, Day 20 at 257.

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and Rosneft in April 2009 as further support for the control of Rosneft’s actions by Respondent.1885

1456. Finally, Claimants submit that Respondent’s argument that, for a breach of a host State’s ECT obligations to have occurred, challenged actions must have been taken by the host State in the exercise of puissance publique is a “nice invention.”1886 All that matters, argue Claimants, is whether the acting entity is an organ of the State, not the capacity in which it is acting.1887 Claimants quote the commentary to Article 4 of the ILC Articles on State Responsibility: “[i]t is irrelevant for the purposes of attribution that the conduct of a State organ may be classified as ‘commercial’ or acta iure gestionis . . . the entry into or breach of a contract by a State organ is nonetheless an act of the State for the purposes of article 4, and it might in certain circumstances amount to an internationally wrongful act.”1888

2.Respondent’s Position

1457. Respondent denies that the actions of any of the following entities can be attributed to it, as none of these entities would have exercised governmental authority or acted under the instructions of, or under the direction or control of, Respondent: Sibneft, Gemini Holdings, Nimegan Trading, Rosneft, YNG.1889 Respondent also denies that the actions of Mr. Rebgun, Yukos’ interim manager and receiver, or the actions of “the meeting and the committee of Yukos’ bankruptcy creditors,” can be attributed to Respondent, for the same reasons.1890

1458. Concerning the attribution of Mr. Rebgun’s actions to the Russian Federation, Respondent points out that “[i]n most European legal systems a liquidator or bankruptcy receiver is not a State organ”1891 and that bankruptcy managers and receivers do not “generally exercise elements of governmental authority or act under the instructions, direction or control of the

1885

1886

1887

1888

1889

1890

1891

Transcript, Day 20 at 257, referring to Press Conference with Russian and Foreign Media, President of Russia Official Web Portal, 23 December 2004, Exh. C-422; Yukos Capital SARL v. OAO Rosneft, Amsterdam Court of Appeal, Decision, 28 April 2009, Exh. C-484.

Transcript, Day 1 at 157‒58 (Claimants’ opening). Transcript, Day 20 at 249 (Claimants’ rebuttal). Transcript, Day 1 at 148 (Claimants’ opening).

Counter-Memorial ¶¶ 1442; 1472–1475; Rejoinder ¶¶ 77, 381, 1044; Respondent’s Opening Slides, Vol. 6, slide 3. Rejoinder ¶¶ 77, 381; see also ¶ 1044; Respondent’s Opening Slides, Vol. 6, slide 3.

Rejoinder ¶ 389.

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State.”1892 Respondent cites several decisions of investment treaty tribunals as well as the decision of the Grand Chamber of the ECtHR in Kotov v. Russia to support this view.1893

1459. Regarding Rosneft, Respondent does not deny that it held 75.16 percent of the shares in this company, that members of the company’s Board of Directors held parallel positions in the Russian Government, or that the company’s President was appointed by the Russian Government. However, Respondent insists that this is not enough to satisfy the standard of attribution under Article 8 of the ILC Articles on State Responsibility, and that Claimants must prove a link between any relevant actions of Rosneft or YNG and specific instructions given by the Russian State.1894 As explained by Respondent at the Hearing:

[W]hat Claimants must establish to attribute the conduct of Rosneft under Article 8 to Respondent―but which they clearly have not proven―is that in acquiring YNG from Baikalfinance, entering into the agreement with SocGen and voting for Yukos’ liquidation at the creditors’ meeting, Rosneft was acting pursuant to specific instructions of a Russian State organ.1895

[emphasis added]

1460. Similarly, with respect to the initiation of bankruptcy proceedings, Respondent asserts that “what Claimants must establish, but what they clearly have not proven, is that in filing the bankruptcy petitions . . . YNG were acting under the instructions or directions or control of Russian State organs.”1896

1461. With regard to the standard applicable under Article 8 of the ILC Articles on State Responsibility, Respondent explains that:

The commentary to Article 8 of the ILC Articles on State Responsibility notes that “it is made clear that the instructions, direction or control must relate to the conduct which is said to have amounted to an internationally wrongful act.” As regards “direction or control,” the commentary states that “[s]uch conduct will be attributable to the State only if

it directed or controlled the specific operation and the conduct complained of was an integral part of that operation.”1897

1892

1893

1894

1895

1896

1897

Rejoinder ¶ 391.

Rejoinder ¶¶ 389–390, referring to Plama ¶ 253; Jan Oostergetel and Theodora Laurentius v. The Slovak Republic, UNCITRAL, Final Award, 23 April 2012 ¶ 155, Exh. R-2940 (hereinafter “Jan Oostergetel”); Case of Kotov v. Russia, ECtHR [GC], Appl. No. 54522/00, Judgment, 3 April 2012, Exh. R-3531 (hereinafter “Kotov v. Russia”).

Rejoinder ¶ 387.

Transcript, Day 21 at 196. See also Transcript, Day 19 at 116. Transcript, Day 19 at 115–16.

Counter-Memorial ¶ 1444, referring to Commentary to ILC Articles on State Responsibility, Article 8 ¶¶ 3 and 7, Exh. C-1042. See also Rejoinder ¶ 382; Transcript, Day 21 at 196.

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1462. Respondent also quotes the following passage from the commentary on the ILC Articles on State Responsibility, which notes that the fact a State initially establishes a corporate entity is not a sufficient basis for the attribution to the State of the conduct of that entity, unless the entity exercises elements of governmental authority.1898

1463. Respondent refers to several decisions of investment treaty tribunals (in particular Jan de Nul v. Egypt, White Industries v. India and Hamester) as well as to the decision of the Iran–U.S. Claims Tribunal in Flexi-Van Leasing v. Iran to support these statements.1899

1464. Finally, although Respondent does not deny that the Russian Tax Ministry is a State organ, the actions of which can in principle be attributed to the State under Article 4 of the ILC Articles on State Responsibility, Respondent submits that it cannot be held liable for the actions taken by the Tax Ministry in the context of Yukos’ bankruptcy because such actions were not taken in the exercise of puissance publique. In particular, Respondent submits that it cannot be held liable for the Tax Ministry’s vote to liquidate Yukos at the creditors’ meeting.1900

3.Tribunal’s Decision on Attribution

1465. The Parties’ differences in respect of attribution are centered on whether there can be attributed to Respondent actions of Rosneft in the acquisition of YNG, and in precipitating and participating in the bankruptcy proceedings. Their differences also include whether the course of the bankruptcy proceedings and the actions in respect of them by the bankruptcy administrator, Mr. Rebgun, are, in whole or in part, attributable to the Russian Federation.

1466. The ILC Articles on State Responsibility are in point. They and their commentary are conveniently republished in a book edited by Professor James Crawford, then the Commission’s special rapporteur on the topic.1901 Chapter II, “Attribution of Conduct to a State,” in its introductory commentary, observes that, “the general rule is that the only conduct

1898

1899

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1901

Counter-Memorial ¶ 1473; Rejoinder ¶ 385, referring to Commentary to ILC Articles on State Responsibility, Article 8, ¶ 6 Exh. C-1042. See also Respondent’s Rebuttal Slides, Vol. 7, slide 50.

Transcript, Day 21 at 197, referring to Jan de Nul N.V. and Dredging International N.V. v. Arab Republic of Egypt, ICSID ARB/04/13, Award, 6 November 2008 ¶ 173, Exh. C-997; White Industries Australia Limited v. The Republic of India, UNCITRAL, Award, 30 November 2011 ¶¶ 8.1.10 and 8.1.18, Exh. R-3545; Hamester ¶ 179; CounterMemorial ¶ 1474, referring to Flexi-Van Leasing, Inc. v. The Government of the Islamic Republic of Iran, Iran-U.S. Claims Tribunal, Case No. 36, (1988) 12 Iran-U.S.C.T.R. 335, Award, 11 October 1986 p. 349, Exh. R-1154.

Respondent’s Post-Hearing Brief ¶ 177; Transcript, Day 19 at 119, 161‒62 (Respondent’s closing).

Articles on Responsibility of States for Internationally Wrongful Acts with commentaries (Text adopted by the International Law Commission at its fifty-third session, in 2001), Articles 1–11 and 28–39, Exh. C-1042.

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